Many of us go through life with aspirations and expectations as to what we’re working towards. For some it’s financial independence as soon as possible, for others could be having a rich and fulfilled life. We expect to reach retirement debt free, ready to enjoy what many call ‘the best years of our lives’.
For a growing number, the reality is somewhat different. With an aging population and longer mortgage terms the prospect of homeownership isn’t possible for everybody. Some may never own their home outright.
Later life lending needs can be both complicated and unchartered territory for borrowers so the role of the Advisor has never been more essential. Understanding client needs, and identifying an appropriate product comes down to three factors:
The key questions to be asked to determine affordability in later life are:
a. How much income is generated from What can your client afford now and in the future?
Entering retirement can mean a drop in income. If mortgage payments are ongoing affordability now, and over the duration of the mortgage will be a major consideration. See our handy retirement journey to see the considerations you and your client may need to think about both now and over their retirement.
b. Has your client built up a savings pot?
Minimising mortgage payments may mean arrangements to repay the capital sum are needed. This could be withdrawn from a pension plan (pensions freedom act), funded by savings, or other forms of investment. If using a pension withdrawal this could affect retirement finances over the long term.
c. Commitment to monthly payments over the long term?
Across the retirement journey, circumstances can change, income can drop and living expenses can increase. Committing to regular monthly payments over many years can seem daunting, and options such as rolling up interest to reduce ongoing commitments could be a valuable safeguard to enable your client to keep their own home.
2. Risk Appetite
a. How risk averse is your client?
The risk of losing your home if you do not keep up repayments is widespread across the mortgage market and an accepted wisdom of owing a mortgage. Not all clients may be comfortable with this level of risk later in life, and with extra considerations around projecting future income changes and affordability, some clients may be looking for a lower risk option, that guarantees they can remain in their home without risk of losing it. For these clients, a lifetime mortgage can offer that peace of mind as there’s options of deferring payments, and rolling up interest.
It’s a question of how important risk is – does the client want the peace of mind knowing they can’t lose their home (but may never own it outright), or is outright ownership more important?
3. Retirement strategy
a. Are your clients comfortable borrowing for the rest of their lives?
Safeguarding the home and removing negative equity concerns may mean having a mortgage that is never repaid. Borrowing through retirement and repaying on death or movement to long term care isn’t for everyone, but to give clients a stress free retirement this could be an option.
Borrowing for the rest of your life can be a psychological barrier for some, especially when a mortgage free retirement may have been the aspiration for many.
b. Planning to downsize?
When children have flown the nest and the house feels empty it can become a burden for many. Ongoing maintenance costs can be costly, especially if affordability is a consideration. Losing a partner in retirement can mean pension income drops too.
Downsizing is a viable route to release equity and find a more manageable home that’s perhaps nearer children or loved ones and has lower maintenance needs. Apart from the stress of moving and the upheaval this can cause, the release of funds could be used to support a retirement lifestyle.
As a major lifestyle consideration, peace of mind of protecting the home through a lifetime mortgage needs to be weighed with the inability to downsize.
c. Accepting of long term care if and when it’s needed?
Improvements to healthcare, and science has meant we’re living longer than ever before.